41 lines
2.1 KiB
Plaintext
41 lines
2.1 KiB
Plaintext
408 Part Ill: Put Option Strategies
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a LEAPS may be used as the long option in the spread. Recall that the object of the
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spread is for the stock to be volatile, particularly to the upside if calls are used. If that
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doesn't happen, and the stock declines instead, at least the premium captured from
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the in-the-money sale will be a gain to offset against the loss suffered on the longer
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term calls that were purchased. The strategy can be established with puts as well, in
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which case the spreader would want the underlying stock to fall dramatically while the
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spread was in place.
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Without going into as much detail as in the examples above, the diagonal back
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spreader should realize that he is going to have a significant debit in the spread and
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could lose a significant portion of it should the underlying stock fall a great deal in
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price. To the upside, his LEAPS calls will retain some time value premium and will
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move quite closely with the underlying common stock. Thus, he does not have to buy
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as many LEAPS as he might think in order to have a neutral spread.
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Example: XYZ is at 105 and a spreader wants to establish a backspread. Recall that
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the quantity of options to use in a neutral strategy is determined by dividing the
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deltas of the two options. Assume the following prices and deltas exist:
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Option
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April 100 call
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July 110 call
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January (2-year) LEAPS 100 call
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XYZ: 105 in January
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Price
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8
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5
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15
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Delta
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0.75
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0.50
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0.60
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Two backspreads are available with these options. In the first, one would sell the
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April 100 calls and buy the July llO calls. He would be selling 3-month calls and buy
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ing 6-month calls. The neutral ratio is 0.75/0.50 or 3 to 2; that is, 3 calls are to be
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bought for every 2 sold. Thus, a neutral spread would be:
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Buy 6 July 110 calls
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Sell 4 April l 00 calls
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As a second alternative, he might use the LEAPS as the long side of the spread; he
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would still sell the April 100 calls as the short side of the spread. In this case, his neu
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tral ratio would be 0.75/0.60, or 5 to 4. The resulting neutral spread would be:
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Buy 5 January LEAPS 110 calls
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Sell 4 April 100 calls |